Royal Bank of Scotland to reveal £4bn losses as result of credit crunch

Friday 18 April 2008 08:52 BST

The Royal Bank of Scotland is set to reveal £4billion of losses ahead of next week when it will turn to shareholders to ask for a £10billion lifeline to help with spiralling costs.

The losses are set to anger shareholders already dismayed at plans to shore up its financies by flooding the market with new stock to raise cash, according to the Financial Times.

Britain's second largest bank intends to shore up its finances by flooding the market with new stock to raise cash in what would be the largest share issue in world financial history.

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The Royal Bank of Scotland: Britain's second biggest bank

RBS, led by chief executive Sir Fred Goodwin, has been forced to act after risky investments and loans linked to America's high-risk mortgage market failed to pay off.

Investors will be left to foot the bill. RBS has 135,000 private shareholders and millions more Britons have a stake through pensions or investment portfolios, which risk netting lower dividend payments.

The bail-out - equivalent to around 27 per cent of RBS's stock market value - will be a huge blow to the credibility of Britain's banks. It also risks causing a further slide in consumer confidence.

Until the collapse of Northern Rock last September, the UK was thought to have one of the world's safest bank sectors.

Now, it is seen as the sick man of Europe.

However, RBS is unlikely to be the only financial institution to hold out a begging bowl.

Barclays is thought to need £ 5billion to bolster its cash cushion because of losses in the risky subprime sector. Bosses may ask shareholders to shell out the cash or inject funds from a foreign investor, such as China.

HBOS, owner of the Halifax and Britain's largest mortgage lender, is also considering its options.

Smaller banks, such as Alliance & Leicester and Bradford & Bingley, have seen their profits hammered and could also be forced to seek fresh funds or sell assets.

One senior bank source said: "All the major banks will be looking at whether they need to raise money by issuing new shares."

He warned that the economic outlook was likely to worsen and many institutions were worried about having enough cash to ride out the storm.

Roger Lawson, director at the United Kingdom Shareholders' Association, said: "Banks are clearly not as safe as people thought."

He added that private shareholders had been lulled into a false sense of security by Sir Fred, who denied in February that a rights issue was pending.

RBS directors plan to meet this weekend to finalise the move, which would be formally announced next week.

The Bank of England and Gordon Brown may also announce a financial package to help the banks as early as next week. This would allow banks to borrow cash more easily and encourage funds to flow into the stricken money markets.

But officials have made it clear that there must be action from the banks in return.

Across the Atlantic, Wall Street giant Citigroup admitted it lost £2.6billion in the first quarter of this year, having lost £5billion in the previous quarter.

The bank also announced 9,000 more jobs would go worldwide as well as the 4,200 cutbacks unveiled in January. The crisis started among sub-prime, or high-risk, homeowners in the U.S. but has spread to households throughout Britain.

Consumers have been forced to pay higher interest on loans and mortgages. Now, they are losing money on their shares as well.

Most bank shares have halved in value since the onset of the credit crunch last summer.

Last night, Royal Bank of Scotland shares closed up 18p at 384p. A year ago, they were worth 671p.

• A rights issue is a common way for companies to raise money. Shareholders have the chance to buy more stock for a discounted price, so shares that may be worth 50p could be sold for 40p in the rights issue. The number that investors can buy depends on how many they already have, for example four for every one owned.

• From council estate boy to Fred the Shred

Sir Fred Goodwin has a tough reputation, feared and respected in equal measure among colleagues and rivals in the City.

Since taking the helm in 2000, the 49-year-old Royal Bank of Scotland chief has overseen a transformation of RBS that has propelled it from a solid regional lender, ranked 391 among the world's banks, to become the fifth biggest in the world.

Much of this growth has been credited to Sir Fred's single-minded determination to push through deal after deal, including the £ 21billion hostile acquisition of NatWest in 2000.

Reputation: Sir Fred Goodwin

Despite his impressive track record, Fred "the Shred" - as he is known following his cost-cutting prowess when he was at Clydesdale Bank - still divides people.

Even rivals admit he is talented, but detractors say he is a micro-manager. He was called a "megalomaniac" by one City analyst for his constant deal-making.

Married with two children, he is intensely private and touchy about media intrusion. In 2004 he issued a writ against a Sunday newspaper for a series of stories about RBS's new £350million Edinburgh headquarters.

One article accused him of wanting to build a private road between the HQ and the nearby airport to avoid travelling on the A8. Sir Fred eventually withdrew the writ.

He was also angered by the same paper suggesting he had ordered a "scallop kitchen" be built close to his office. The paper later apologised for suggesting the kitchen was specially built for scallops.

Sir Fred's high-flying lifestyle now is a far cry from his humble roots. He grew up in Ferguslie Park, Paisley, a large council estate which now is home to some of Scotland's biggest drug dealers.

His father, Fred senior, an electrical engineer, is thought to have been influential in driving his ambitions. And like many in his situation, Fred junior used education to better himself. He attended Paisley Grammar and then studied law at Glasgow University.

After graduating, he switched to study accountancy, becoming a partner of Touche Ross, now Deloitte, at just 29.

He came to prominence when, in the early 1990s, he led the team tasked with cleaning up the mess from the high-profile collapse of bank BCCI. His job was to oversee the liquidators recovering assets from the bank, which had catered to Saddam Hussein and the Medellin drug cartel of Colombia.

In 1995, National Australia Bank asked him to become deputy chief executive of its Glasgow-based Clydesdale Bank.

By 1998, former RBS chief Sir George Mathewson had spotted Goodwin's talents and persuaded him to become his deputy.